That’s because home prices, which peaked in 2007, rose 7.4% in November from a year ago, according to real estate firm CoreLogic. That’s the largest year-over-year increase since 2006, when the housing industry was nearing its peak.

As home values rose, the number of “underwater” borrowers fell last year by almost 4 million, and that total could drop to 4 million within two years, according to JPMorgan Chase & Co. (NYSE: JPM).

That’s good news not only for the housing industry, but for the entire economy.

“For most middle class households, homes are by far their biggest asset,” Karen Weaver, head of market strategy and research at investment firm Seer Capital Management LP told Bloomberg News. “So once the housing market starts to recover it helps consumer spending, it helps the whole economy.”

Signs of a U.S. Housing Market Recovery

Housing prices have rebounded due to a lower supply of existing homes for sale as foreclosures slow down, and improved demand from higher consumer confidence and record-low interest rates.

“For the first time in almost six years, most U.S. markets experienced sustained increases in home prices in 2012,” Anand Nallathambi, president and CEO of CoreLogic, told CNBC. “We still have a long way to go to return to 2005-2006 levels, but all signals currently point to a progressive stabilization of the housing market and the positive trend in home price appreciation to continue into 2013.”

Home sales are also up. During 2012 they rose 6% to 4.2 million, the first increase since 2005.

This ongoing housing market stabilization delivered significant gains for investors who bet on the housing recovery in 2012. If homebuilders deliver a strong earnings season, those gains could continue at the start of 2013.

For example, Lennar Corp. (NYSE:LEN) stock is up over 82% the past year and it reported earnings yesterday (Tuesday) that beat estimates. The Miami-based builder also announced it delivered 4,443 homes, up 32% from last year, while the average selling price of those delivered homes rose 7% to $261,000.

Housing Stocks Look for Rally in 2013

Analysts expect homebuilders to have another successful year, spurred by the declining supply of existing homes and the continued increase in prices and demand.

FactSet Research Systems Inc. (NYSE:FDS) even projects fourth-quarter earnings from homebuilders in the S&P 500 to grow 238.4% year-over-year, compared to an average growth of just 1.7% for all S&P 500 companies.

With housing stocks coming off tremendous success in 2012, they hope continued housing market recovery will push them closer to their all-time highs reached in 2005.

Each of the following stocks returned more than 50% over the past 12 months, and all of them currently have a “Buy” rating by Goldman Sachs Group Inc. (NYSE:GS).

KB Home (NYSE:KBH):Up more than 80% from a year ago, but at its current price of $16 is still a long way from its $80-plus peak.

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